Pay rises are a plus for the economy
07/03/2017
Wages across Europe have been suffering
much in the aftermath of the Great Financial Crisis. Before the
crisis, nominal wages were increasing at a rate of 3 to 3.5%. Since
then wage dynamics have substantially come down.
What explains this weakness in wages?
One factor is of course the crisis itself and the high and
persistent unemployment that was caused by it, thus weakening the
bargaining position of trade unions and workers. Another key factor
however is policy. Policy makers embarked on structural reform of
wage formation systems with the aim of weakening or even
dismantling all sorts of institutions and mechanisms that work to
back up wages and collective bargaining. This became known as an
“internal devaluation” of wages.
If we want to turn the tide and if we
want to give workers in Europe a pay rise, then we need to get the
message across that squeezing wages is bad policy and that the
opposite is required: More robust wage increases assist the economy
to perform better.
The attached paper describes the reasons why pay rises are a plus for the economy